1. A large auto manufacturer sells large fleets of vehicles to auto rental companies, such as Budget and Hertz. Suppose Budget is negotiating with the auto manufacturer to purchase 827 vehicles. Write a short paragraph to explain to the auto manufacturer when the company should, and should not, record this sales revenue and the related expense for cost of goods sold. Mention the accounting principles that provide the basis for your explanation.
2. Identify the accounting concept or principle that gives the most direction on how to account for each of the following situations:
a. Salary expense of $38,000 is accrued at the end of the period to measure income properly.
b. March has been a particularly slow month, and the business will have a net loss for the second quarter of the year. Management is considering not following its customary practice of reporting quarterly earnings to the public.
c. A physician performs a surgical operation and bills the patient’s insurance company. It may take three months to collect from the insurance company. Should the physician record revenue now or wait until cash is collected?
d. A construction company is building a highway system, and construction will take four years. When should the company record the revenue it earns?
e. A utility bill is received on December 27 and will be paid next year. When should the company record utility expense?